The government can track BTC owners through KYC because at KYC we are asked to state your identity and photos clearly, besides that through government exchanges can also track BTC owners.
But in countries that Bitcoin or the usage of crypto currencies are banned how will people do KYC? lol. They will not track people with KYC bro they'll use a different method of tracking people from their country.
But people can make peer to peer transactions easily. In this way, identities won't be disclosed. The owners of wallets are always unknown. Even if you withdraw your coins from an exchange to your personal wallet, it doesn't mean you are the owner of that wallet. You might pay to another person.
Even without KYC "Know Your Customer" thing, governments can still track a person if he/she is using crypto currencies by data traffic, with this method they can track what website do you browse on your computer or on your mobile devices and if they tracked that you are browsing a wallet website or you are downloading a desktop wallet they might probably detect you that you are using crypto currencies. The government can do anything if they want to because they got all the funds that they needed if they want to trace certain people that are doing illegal activities in their respective countries.
